Fast fashion? Faster distribution!
Inditex's focus on customer behaviors, nimble sourcing strategy, and high tech logistics allows them to bypass the traditionally long inventory timelines typically associated with the fashion industry.
“Inditex’s business model is characterized by the search for flexibility in adapting production to market demand by controlling the supply chain throughout the various stages of design, manufacture and retailing. This enables it to focus both its own and suppliers’ production on changes in market trends during each sales campaign. The Group’s logistics system is based on constant deliveries from the distribution centres of the various commercial formats to stores throughout each season. This system essentially operates through centralized logistics centres for each concept in which inventory is stored and distributed to stores worldwide.” [i]
No matter where you are in the world, when you want to go shopping, there is almost always a Zara. Zara has become the epitome of fast fashion in recent years blending quality, trendiness, and affordability all in one place. Zara customers have come to expect new styles as often as every two weeks. But how is this even possible?
As we have learned in TOM this semester, the retail industry is a challenging industry from an operations perspective. Companies must predict demand well before any fashion trends and demand from consumers can be measured. They are then required to carry significant inventory costs in order to bring their goods to market. Zara has seemingly bypassed this long production process and have found an improved operating structure compared to that of their peers. Is Zara just better at predicting trends? Are they insider trading fashion ideas from top designers? In this post we will examine Inditex as an extremely effective example of alignment between operating and business models.
Inditex’s business model is to deliver new trends to their customers quickly. They turn over inventory in stores rapidly and are constantly at the forefront of design and fashion. They distribute their merchandise through their own network of stores as well as their online presence. Their business model is widely recognized throughout the industry as a uniquely positioned and innovative [ii].
[i]
Inditex’s operating model facilitates their ability to delivery new merchandise frequently through a series of processes that reduces inventory holding and speeds up production time based on customer purchasing behavior. Inditex is able to execute on their business model by focusing on three key factors of their operating model.
- Focus on customer behavior
“The day-to-day work of those who make up Inditex is constant adaptation to customers, the environment and society. Both Inditex employees and its work processes are focused on listening to the customer” [i]. Inditex orders 50% of merchandise ahead of season, compared to nearly 100% with competitors. This reduction in inventory allows store managers significantly more flexibility to order new merchandise and reorder top selling merchandise continuously based on customer purchases. Management has stated that more than 80% of Inditex clothing is produced in direct response to sales data.
- Nimble sourcing strategy
Inditex’s sourcing strategy support their enhanced flexibility model. Specifically, the majority of Inditex’s clothing stock comes from regions that are geographically close to the main distribution centers in Spain, this reduces shipping times which can be a large part of the production time line [i]. As Inditex continues to grow globally, this will need to be an area of focus, in order to ensure they have the best as well as most convenient suppliers moving forward.
- High tech logistics
Additionally, Inditex has high tech distribution and logistics systems in place which management has cited as the company’s prime enabler of their industry-leading lead time from design to store in four weeks [i]. In 2014, Inditex mentioned their decision to launch an improvement to the already impressive logistics system, called the RFID project. RFID allows Inditex to uniquely identify an item and follow that item from production through sale [i]. Inditex is able to ship new items to store as quickly as every two weeks [iii].
These three key areas of the operating model are what enable Zara’s doors to stay open and their customers to leave happy (if not a bit poorer).
Referenced sources:
[i] 2014 Annual Report, http://www.inditex.com/investors/investors_relations/annual_report
[ii] 2015 Forbes, http://www.forbes.com/companies/inditex/
[iii] Business of Fashion profile, http://www.businessoffashion.com/community/companies/inditex
Additional sources:
November 2014, RBC Capital Markets Analyst Report
September 2014, JP Morgan Analyst Report
Company website
Such a lovely read! Thank you. Fast fashion relies on low costs and large volumes as you mentioned. This type of companies (along with GAP and H&M) had a fair amount of backlash when a garment factory collapsed in Bangladesh and made very clear that safety measures were not enforced and working conditions were deplorable. Do you think fast fashion and some respect for both the environmental and social standards are compatible?
Thank you for your comment, Jonathan. You bring up a very important point, I do not think that fast fashion can exist at the prices that we see today while also having a respect for social standards. However, I do think there is the possibility for the two to coexist should prices be raised. There are some companies today, such as Everlane, that have focused on this connection between high quality social standards and cheap clothing. There is nothing inherent to Zara’s business model today that would prohibit them from righting this issue.
Nina – as someone who knows very little about the fashion industry, I found your post both informative and fascinating! You really highlighted how Inditex’s innovation in supply chain management has allowed it to differentiate itself as an industry leader. One thing your post made me think further on: another way that their operating model creates value for their customers is by minimizing the feeling that your clothes from Zara are too “mainstream”. Because Zara is such a widely worn fashion brand, this could be a concern but the fast turnover in stores lowers the likelihood that you’ll see other people or your friends wearing the same clothing, and therefore increases customer loyalty to the Zara brand and keeps shoppers coming back to find fashionable pieces. Would you agree? Would love to hear your thoughts! Thanks again for writing about this great example!
Awesome read, Nina! I’ve been a big fan of Inditex and think it’s fascinating how their operating model has driven such tremendous success! The fact that they have no presence at the department stores (if I recall correctly) I think is great, considering that they (especially U.S. department stores) tend to really squeeze brands’ margins with markdowns. That was certainly an issue we had back at DKNY, where merchandise 100% of orders are placed six months ahead of season by wholesale accounts and retail stores and marked down based on sell-through performance. We actually also started implementing RFID over the past couple of years for the same purpose of tracking merchandise from start to finish.
What I wonder now is, would and could Inditex’s operating model be translated to other brands within the low- to high-end spectrum?
Totally agree with both Charlotte’s and Gabo’s points. We will have to see whether the business model can be adopted but I see no reason why not considering how well it works for Inditex!
Great post and thread!! Zara is a true classic in how it does this. We used to do a case on it in RCTOM. Thank you for sharing!!!
Fantastic read Nina! You had a great description of the key factors that make Zara’s operating model a huge success in the fashion industry. It is fast, trendy and affordable! Indeed, the most healthy and sustainable Spanish company at the moment. What impresses me the most is how its outstanding logistics can lead to low inventories that can actually create an urgency to buy for customers. This goes also on top of the sense of exclusivity that Charlotte rightfully pointed out. When visiting the stores, the customers know that they have to buy clothes before they are sold out!
Thanks for writing about this amazing company!